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Investment Demand When Economic Depreciation is Stochastic

Author

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  • Panos Fousekis
  • James S. Shortle

Abstract

The neoclassical model of investment by a risk-neutral firm is generalized to include uncertainty about the rate of depreciation by replacing the deterministic capital accumulation identity with a stochastic variant. Ito's stochastic dynamic optimization is used to derive conditions for optimal investment. A nondegenerate steady-state distribution of the capital stock is shown to exist and is derived for the empirically important case of a normalized quadratic profit function and static price expectations. It is demonstrated for this case that uncertainty about the rate of depreciation decreases the expected steady-state capital stock and investment.

Suggested Citation

  • Panos Fousekis & James S. Shortle, 1995. "Investment Demand When Economic Depreciation is Stochastic," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 77(4), pages 990-1000.
    • Handle: RePEc:oup:ajagec:v:77:y:1995:i:4:p:990-1000.
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    File URL: http://hdl.handle.net/10.2307/1243822
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    Cited by:

    1. Calum G. Turvey, 2010. "Biography," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 70(1), pages 5-20, May.
    2. Tina Engler & Alfons Balmann, 2015. "On Investment Consumption Modeling with Jump Process Extensions for Productive Sectors," Journal of Optimization Theory and Applications, Springer, vol. 167(3), pages 949-958, December.
    3. Price, T. Jeffrey & Wetzstein, Michael E., 1997. "Irreversibility Investment Decisions with Yield and Price Uncertainty," 1997 Annual Meeting, July 13-16, 1997, Reno\ Sparks, Nevada 35864, Western Agricultural Economics Association.
    4. Ruranga, Charles & Ocaya, Bruno & Kaberuka, William, 2014. "Analysis of Rwandan Economic Performance Before and After the 1994 Genocide," African Journal of Economic Review, African Journal of Economic Review, vol. 2(2), July.
    5. Poudel, Diwakar & Sandal, Leif K. & Kvamsdal, Sturla F. & Steinshamn, Stein I., 2011. "Fisheries Management under Irreversible Investment: Does Stochasticity Matter?," Discussion Papers 2011/20, Norwegian School of Economics, Department of Business and Management Science.

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